From Vicious to Virtuous Circle

Fibre to the Home Council Europe Investor Day 2013

The Experience from Project Owners – Part II

19th February 2013

CityFibre

• The UK’s leading urban shared fibre

infrastructure provider.

• 30,000 km of fibre, 50 UK towns and cities.

• Largest FTTH network in the UK.

• Gigler, delivering 1.0 Gbps consumer FTTH

services.

• Supported by the world’s leading investment

banks; Macquarie Capital, UBS and Citigroup.

• Rolling out citywide fibre infrastructure for public

services, mobile backhaul, businesses and

residents.

To empower the UK society by delivering

transformational fibre infrastructure that is

a foundation of the digital economy D

D

D

FTTH Council Europe – February 2013 Slide 2

Shared Citywide Fibre

The UK’s Most Powerful Broadband Gigabit FTTH

Financial Horsepower:

Engineering Strength:

How to break the vicious circle?

3 (Source: Solon Strategy)

Potential partners and

customers want to see

strong financial backing

Potential investors and

lenders want to see firm

proof of demand…

…successfully

converted into

maximum utilization of

assets at scale…

…AND underpinned by

long-term contractual

commitments giving

visibility on investor

returns and long-term financial viability

Entrepreneurial Dilemma

FTTH Council Europe – February 2013 Slide 3

Demand ?

Execution ?

Utilisation ?

Sustainability ?

Capital ?

Lessons From Abroad

4

Cross-subsidy from utility business (Norway,

Denmark, Germany)

• Captive service provider model, demand aggregation

model, low cost of capital

Cross-subsidy from existing telecom business (Hong

Kong, Turkey, Russia)

• Strong existing cash flows, cross-marketing strength,

mature corporate funding structure

Pure entrepreneurial capital (Netherlands)

• Established track record and investment from

incumbent unlocked lower cost of capital, regulated

pricing = long term visibility on shareholder returns

FTTH Council Europe – February 2013 Slide 4

Key Themes

5

Strong cash flows from existing business mitigate

risk, allowing lower cost of capital

Strong equity backing from corporate entity with low

perceived counterparty risk, unlocks affordable debt

Captive service provider model, or open access with

contractual penetration commitment from anchor

Demand aggregation strategy to minimize execution

risk, increase visibility of investor returns

Pricing transparency and regulatory visibility

FTTH Council Europe – February 2013 Slide 5

Don’t believe the hype

6 (Source: Solon Strategy)

UK broadband market is

more fragmented than

many European markets

Apart from Virgin, the

entire retail market is

captive to the

Openreach roadmap. No

real differentiation is

possible

In a non-Virgin town of

50k homes, alternative

SPs spend c.£2.5m per

annum consuming

Openreach products

Over ten years, this

would be more than

adequate to fund

ubiquitous fibre

throughout the town

The UK “exception” ?

FTTH Council Europe – February 2013 Slide 6

CityFibre’s Model Attracts Institutional Finance

Creating a platform for large scale infrastructure rollout

FTTH Council Europe – February 2013 Slide 7

Participating Investors

CityFibre Vehicle Holding Shared Fibre Assets

Participating Service Providers

End Customers

Equity, Debt ROI, Dividends

Wholesale Access

Retail Services

Access Charges

Service Charges

An

cho

r Tenan

cy Su

pp

orts In

vestmen

t

• Commitment by investors to

fund is supported by anchor

tenancy agreements:

• Anchor tenancy model provides

an environment of predictable

cash flows;

• Predictable cash flows enables

financing at a lower cost of

capital;

• Lower cost of capital leads to

attractive wholesale access

charges.

Delivering Infrastructure with Attractive Yields

FTTH Council Europe – February 2013 Slide 8

5 years 10 years 15 years

Construction continues through yield phase

Initial Construction Phase Yield Phase

Anchor tenant commitment period (5 to 10 years)

Anchor Tenants Mitigate Demand Risks Engineering Partners Mitigate Delivery Risks

Natural Demand

Deliver in urban areas for optimal ROI

Private Equity Investors Infrastructure Funds

Investment risk reduction drives to a lower cost of capital

We’re all in this together

9 (Source: Solon Strategy)

Market risk partially

mitigated by long-term

contractual anchor

commitments

Execution risk mitigated

via city engagement

model

Utilization maximized

via exploitation of other

market verticals

First-mover advantage

and high RoI secures

sustainability

Availability of capital

increases, cost of

capital falls, subsequent

projects are easier to

fund

A Virtuous Circle

FTTH Council Europe – February 2013 Slide 9

Demand

Execution

Utilisation

Sustainability

Capital

Thank You

10

James Enck

james.enck@cityfibre.com

The report is available at:

www.cityfibre.com

www.oxera.com

FTTH Council Europe – February 2013 Slide 10

Oxera Draft for Comment: Strictly Confidential i

Feasibility and implications of a shared fibre access model in UK towns and cities

Economic review of CityFibre’s model in comparison with a co-investment model

February 19th 2013